Monday, January 09, 2012

An odd bit of logic

Yesterday I moderated a forum on higher education issues and was struck by one of the comments of one of the panelists.  One of the issues we discussed was whether the current model for financing higher education is broken.  There are a lot of indicators - college tuitions have risen pretty steadily at a rate higher than the CPI or even health care prices for a sustained period; last October student debt began to exceed all consumer debt.   But my colleague argued that "we changed student loan policy so that private loans are no longer necessary."  When the Obama Administration came in one of their immediate priorities was to eliminate the private role in student loans.   There were plenty of problems to point to.   Financial aid administrators were getting lots of fancy perks;  the banks were making pretty dandy fees.   But as I thought about it the more absurd the statement became.  Some parts of higher education were recruiting ill-prepared students to take classes based on their eligibility for student loans.

There are obvious alternatives between a state regulated model like we had when the federal government issued guarantees and offered banks fees to run a program and a complete government takeover.   The risks of the government takeover are huge.   The government will have even more authority over colleges and universities because they have exclusive control over who is able to borrow money.  A good example of that came this summer in the budget fight when the subsidy that is offered to graduate students while they are in school was eliminated.   In the next round of budget adjustments it is highly probable that undergraduates will also lose the subsidy so their net cost of borrowing will rise.   But it doesn't stop with loan policy - when you receive lots of money from the feds they also express an interest in all sorts of other things colleges and universities do that are not related to student financing.

The other model is to either let the market solve the problem of student loan finance or to introduce some modest regulations which help to define the marketplace for student loans (one is the complete free market the other would be akin to licensing that goes on for securities dealers).   The opponents of the market approach would argue that there will not be sufficient loan capital for students to attend college.   If the market is actually viable - that possibility is small.

The more I thought about my colleague's comments, the more I was reminded of Aeroflot or the Trabant. Both were examples of state run enterprises.   With all the turmoil we've had since the Carter Administration eliminated the government role in selecting winners and losers in the airline industry, it is hard to argue that consumers are not way better off in terms of options.  The same would probably apply to student loans.

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